Nobody wants to be ripped off. And last year, more than 4m British consumers
changed their gas and electricity supplier to avoid being clobbered by
rising energy prices.
The energy switching market remains lively, with hundreds of thousands of
households moving every month. However, the steady decline in energy prices
since February has made life more difficult for price-comparison websites,
which have made a fortune from this business.
“The market has not grown as it should,” said Andrew Salmon, chief executive
of uSwitch, one of the market leaders. Although the firm is up on last year,
“we have not done as well as forecast”.
Persuading people they can save money against a backdrop of falling prices is
more complicated, said Salmon.
British Gas, an easy target for criticism last year, has also raised its game.
It claims its Click Energy package is the cheapest dual-fuel deal on the
market, and it has won 900,000 customers since February.
None of that switching has been done through uSwitch, which has a fractious
relationship with British Gas. uSwitch customers are unable to use its
website to sign up with the leading gas supplier.
Partly in response to this changing market, uSwitch is moving into new areas,
such as car insurance, and has spent £5m on advertising to attract new
customers with a television campaign featuring a gospel singer in blue
spandex.
The heavy marketing investment has cut into online profits at EW Scripps, the
American media company that paid £210m for uSwitch last year. Shares in
Scripps have fallen sharply in recent months.
The challenges facing uSwitch provide an interesting backdrop to the proposed
sale this summer of some or all of the shares in three leading online
price-com-parison sites. Moneysupermarket, which is expanding rapidly beyond
its origins in credit cards, loans and mortgages advice, is contemplating a
stock-market flotation with hopes of securing a valuation of £1 billion.
Confused.com, part of the quoted insurance group Admiral, is considering a
sale of a minority stake in a deal that could value the five-year-old
business at £700m.
And the owners of Cheapflights, one of Britain’s oldest travel dotcoms, are
reviewing the possibility of a £200m sale.
Experts are agreed that online comparison shopping still has much further to
grow. But the sector is already crowded – for example, the consumer body
Energy-watch has given accreditation to 12 energy-switching sites – and
barriers to entry are low. Tesco is working on plans to bring its
value-for-money reputation into the comparison-shopping arena, and this year
will launch Tescocompare.com, initially for car insurance.
This has prompted some to wonder whether some of the big valuations being
touted can be sustained in more “normal” times when deal-making activity is
less feverish than it is today.
Daniel Gestetner, the entrepreneur who founded Shopsmart, an early comparison
site that was sold to Barclaycard in the dogdays of 2001, said: “People are
putting crazy valuations on some of these businesses. Is Moneysupermarket
really worth £1 billion?”
Once again, uSwitch provides a useful reality check. According to insiders,
when Salmon and Lord Milford Haven, the principal shareholder, began seeking
offers for uSwitch, they expected the business to fetch not much more than
£100m – or less than half the amount that Scripps eventually paid for it.
THE FIRST shopping comparison services to make an impression were websites
such as Shopsmart, Pricerunner and Kelkoo – firms that allowed consumers to
compare prices of goods such as CDs and books, computers and electronic
equipment, and clothing. But as the success of Moneysupermarket, Confused
and uSwitch has demonstrated, there are much richer pickings to be made in
comparing services where consumers have no interest in looking at or
handling the goods.
It is estimated that about half of all UK motor insurance is now written
online. Confused has a 65% share of that portion arranged through
quote-comparison services, giving it a total market share of about 13%.
Better still, the high value of financial services, in particular, makes
customer introductions more valuable. Glen Drury, a former Kelkoo executive
who is now a vice-president at Yahoo, which bought the shopping site in
2004, said: “Banks are willing to pay an enormous amount to get somebody to
sign up for a credit card – perhaps £50. If you have a good conversion rate
[turning leads into sales] you can make enormous amounts of money.”
Last year Confused made a profit of £23.1m and is forecast to make about £30m
this year. Moneysupermarket is said to have made a profit of more than £30m.
Nonetheless, Drury is among those who struggle to justify the valuations being
placed on these businesses. The board of Admiral seems to harbour similar
doubts. Although Admiral has no desire to sell control of Confused, and sees
plenty of scope for further growth, it is interested in taking advantage of
these rich valuations. Some say it would be foolish if Admiral did not take
the opportunity to cash in part of its stake while still keeping control.
To continue growth, the leading sites are expanding beyond their original
specialisms. Confused is offering credit cards, loans, gas, electricity and
broadband. uSwitch has added a range of personal finance and insurance
comparisons. Moneysupermarket has gone further, with price comparisons on
flights, holidays, cars and mobile phones, and a full shopping service.
“We are all competing on a similar battle-field,” said Salmon. In the three
largest online markets of car insurance, personal finance and energy, “the
three of us totally dominate”. Salmon said the newer lines of personal
finance and insurance are the fast-est-growing in uSwitch’s business. Simon
Nixon, chief executive of Moneysupermarket, drew a parallel with online
search and auctions, where Google, Yahoo and eBay have pushed aside smaller
rivals. “What’s emerging in the price-comparison sector is similar,” he
said. “The top two players have a huge percentage of the market.”
He added: “Once you’ve got momentum and built a brand, and the site does what
it says on the box, the consumer would tend to stay with that site. If
anything, we have increased our market share even though there’s more
competition coming into this marketplace.” Based on figures from Hit-wise,
the internet data firm, Nixon said Moneysupermarket has a 52% share of the
UK’s financial price-comparison market. By traffic and revenue,
Moneysupermarket believes it is the biggest financial price-comparison site
in the world, even outpunching American rivals such as Bankrate.com. “That
shows what a fantastic marketplace the UK is,” said Nixon. KELKOO has also
expanded its offerings to include finance and mortgages, although Drury said
these are not actively promoted, partly because Yahoo has other priorities
but also because selling complex financial products such as mortgages tends
to require some human intervention.
“From a technology standpoint, there’s very little barrier to entry,” said
Drury.
That increases the importance of brand, and keeping down the costs of
attracting potential customers.
Yahoo offers financial products through Kelkoo because it already attracts
millions of visitors as the world’s busiest website. Its rivals in the
price-comparison business have to invest heavily in advertising their wares,
not just on television, but through Google, Yahoo and other search engines.
Drury said there are signs that the rising competition is driving down the
value of customers. The cost of bidding on “credit card” as a search term
has almost halved over the past year, falling from about £2.70 to £1.40.
“The market is less robust,” he said. “There’s an increased supply of
[companies] selling cards. There’s not an increased supply of people wanting
to get them. The debt that the average Briton is carrying is very, very high
compared with average earnings.”
uSwitch and Moneysupermarket both said that more than half their traffic now
comes direct to their sites, rather than through search engines. “Google is
incredibly important,” said Salmon. “But if we did not have it, it would not
kill us.”
JONNIE GOODWIN, chief executive of Long Acre Partners, a corporate-finance
boutique specialising on the media sector, is one of the beneficiaries of
the booming interest in online businesses.
Long Acre advised Friends Reunited on its takeover by ITV; uSwitch on its sale
to Scripps; and Simply Switch on its £22m purchase by Daily Mail &
General Trust last year. The firm has also been appointed by Cheapflights to
help review the options to realise capital for the company’s management and
shareholders.
Long Acre was acquired last week by Jeffries, the American investment bank,
for a reported £40m. Goodwin is reckoned to have made £14m and will become
head of media investment banking for Jeffries, spending half his time in New
York. He was unworried by market concerns about valuations. “I have a very
simple view on value,” he said. “If you are achieving the levels of growth
that some of these businesses have seen, these multiples [of profits] are
defendable on very simple maths if these growth rates are achieved.”
He added: “Confused.com is a great business, Moneysupermarket is a great
business, uSwitch is a great business. We all like a good deal. If you
connect a buyer with a seller, particularly for products that have higher
margins and attract higher payments, that model can be very successful. The
beauty of it is that the more traffic you put into it, the more money you
make.”
That much is true, but it does not necessarily mean that Scripps shareholders
got a bargain when it bought uSwitch.
Investors looking at Confused and Moneysupermarket will face a similar
dilemma.
YOUNG INVENTOR KEEPS EUROPE AT FOREFRONT OF TECHNOLOGY
AS the nation settles down for another season of Big Brother, Richard Jones is
a useful reminder that there is another way to find youthful fortune.
Jones, 24, is reckoned to have made about £19m last week when the music
website he helped create was sold to CBS, the American television and radio
company, for $280m (£142m).
Jones was a computer science undergraduate at Southampton University when he
wrote the software that was the basis of Last.FM’s success in attracting 20m
users. Audioscrobbler tracks what music you play from your computer and
iPod, allowing Last.FM to create personal charts, find “neighbours” with
similar tastes, and recommend music.
The music industry already uses Last.FM to try out bands. The site makes money
from advertising, subscriptions and music sales.
Danny Rimer of Index Ventures, which is thought to have made a $50m profit
last year on its investment in Last.FM, said this was another example of how
Europe is developing some of the most original technology companies that can
attract premium prices.
Rimer said successes included Skype, the internet telephony firm sold to eBay
for $2.6 billion, and Joost, the television venture backed by Skype’s
founders.
